Greetings cheeriosok,
That's a lot of (very good) questions! As you point out, this is a complex work, and surely one of the most difficult nocturnes, so it's not surprising that you struggle with it if you have only played for four or five years.
A simple answer, and one that you probably don't want, would be that you could be satisfied for the moment with having learnt the notes, leave it and come back to it in a few years...
Anyway, about the pedal: I wouldn't worry about getting too dry. Much better to pedal each chord. You can hold certain notes that you don't want to lose with the fingers when you change pedal (eg bass notes in m 14?).
Yes, I think you are supposed to lead the trills into the next note. Does that make keeping the rhythm difficult? I think that when you practice, it's good to assign a certain number of trill notes to each eighth note (in this case maybe 5, i.e. c#,d#,c#,d#,c#b,c#,b,c#,b), but when you get to a certain point it's better to stop counting and just let the trill flow freely.
The problem of producing a beautiful legato touch is of course essential - at the same time it's hard to formulate a recipe for it in writing that would work for everyone. I think you are already doing one of the most important things, which is listening for what you want and recognizing it in other people's performances. I suppose some of the obvious elements of a beautiful, cantabile-style, legato have to do with: balance; the ability to use exactly the right amount of weight to connect each note to the next; knowing how you want to shape the phrases dynamically etc.
The thing is that to develop in this field, you simply need to work regularly and for a long time with a good teacher, who is able to listen objectively and competent enough to be able to instruct and correct your movements in a way that helps you achieve the sound you are looking for.